Download Chapter 21 Institutional Investment and REITs

Chapter 21
Institutional Investment and
REITs
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Major Topics
 What is Institutional Investment?
 The Players in the Institutional Investment
Industry
 What are REITs?
 REIT regulation and earnings measures
 Measures of Risk
 Modern Portfolio Theory and the Role of
Real Estate Equity
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Institutional Real Estate
Investment
 The total value of pension fund assets grew
from around $500 Billion in 1980 to over
$4.3 Trillion by 2001
 Substantial growth of pension fund capital
is expected to continue into the 21st
century as the 75 million-strong "baby
boom" generation hits its peak earning
years and prepares for retirement
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Investing in Real Estate vs.
Stocks and Bonds
 Large lump sums are required to purchase a
single real property asset
 Property management and real estate asset
management services are needed
 Real Estate is Illiquid, and takes longer, and
is more expensive (per dollar invested), to
sell real property assets than to sell the
financial securities
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Public and Private Asset Markets
 Public asset markets refers to public
exchanges such as the New York Stock
Exchange, which provide easy and
inexpensive access to all investors, large
and small
 Private asset markets refers to markets in
which the individual capital assets are
traded privately in "deals" negotiated
between individual buyers and sellers
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Modes of Investing in Real Estate
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Industry Associations
 PREA: The Pension Real Estate Association
 NCREIF: The National Association of Real
Estate Investment Fiduciaries
 AIMR: The Association for Investment
Management and Research
 NAREIT: The National Association of Real
Estate Investment Trusts
 RERI: The Real Estate Research Institute
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
REITs
 Real Estate Investment Trusts were created
by Congress in 1960
 a REIT is a company dedicated to owning
and, in most cases, operating incomeproducing real estate, such as apartments,
shopping centers, offices and warehouses
 The main benefit of being a REIT: one level
of taxation similar to a partnership
 Main limitation of being a REIT: a restriction
on earnings retained by the company
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
REIT Growth
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
REIT Ownership
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
How Do Institutional Investors View
Risk in a Portfolio Context?
 Total Risk
 Systematic Risk
 Beta
Measures of Risk-Adjusted Returns
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Measures (Contd.)
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Portfolio Theory and the Role of
Real Estate Equity
 MPT is the modern, quantitative version
of more traditional diversification rules
of thumb
 MPT suggests that real estate equity
ought generally to be one of the major
asset classes in the portfolio, along with
stocks and bonds
 MPT is also applied to institutional real
estate investment
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Modern Portfolio Theory
 The essential idea in MPT is to find
combinations of investments (i.e.,
"portfolios") which will minimize the
amount of portfolio risk (i.e., volatility
across time) for a given target total
return, or (equivalently) maximize the
expected portfolio return for a given
target maximum portfolio risk
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
MPT (Contd.)
 The required informational inputs to
solve this portfolio problem are, for each
asset or class of assets to be considered
in the portfolio:
 Expected return
 Volatility (standard deviation of return
across time)
 Correlation’s coefficients of the
returns between each pair of assets
(or asset classes)
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
MPT (Contd.)
 Example: using a quadratic programming
optimization technique
 The portfolio mean is just the weighted
average of the individual asset means:
 The portfolio volatility is the square root
of the portfolio variance
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
END
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner